Investing in Stocks
Opening the Right Account
Stock investing can be done through a wide variety of brokerage account types, including Cash Accounts, Margin Accounts, Short Accounts, Retirement Accounts, and Education Savings Accounts. To begin investing, the account will need to be funded with sufficient cash to cover the purchase. Continue reading to learn information you should know before investing in stocks.
Placing a Stock Order
When you place a stock order through Firstrade, you will be able to choose from the following order types:
Limit Order: An order to buy a specified quantity of a security at or below a specified price or to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the stock than whatever price is set as his/her limit. However, the order may not be executed if the market price never reaches the limit price.
A buy limit order can be put in for $2.40 when a stock is trading at $2.45. If the price dips to $2.40, the order will automatically be executed.
A sell limit order can be put in for $5 when the stock is trading at $4.25. If the price rises to $5, the order will automatically be executed.
Market Order: An order to buy or sell a stock at the current market price. The price that a customer pays (or receives) is usually the same or close to the quote when the order is placed, depending on how quickly the order is handled and how actively the stock is traded.
Stop Order: A sell stop order sets the sell price of a stock below the current market price, therefore protecting profits that have already been made or preventing further losses if the stock drops. This type of order will become a market order when the market price of the stock touches or goes below the sell stop price. On the contrary, a buy stop order is entered at a price above the current offering price. It is executed when the market price touches or goes through the buy stop price.
A buy stop order is to buy a security which is entered at a price above the current trading price. If you enter a buy stop order at $20 when the stock is currently trading at $17, the order will become a market order and execute when the stock trading price touches or goes though $20.
If you own shares of ABC Co., which is currently trading at $50, and want to hedge against a big decline, you could enter a sell stop order to sell your ABC holdings at $48. If ABC’s price hits or trades below $48, your sell stop order is triggered and converts into a market order to sell ABC at the next available price. If the next price if $47.90, your ABC shares would be sold at $47.90. A sell stop order is designed to limit an investor’s loss on a position in a security.
Stop Limit Order: An order that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
Let's assume that ABC Inc. is trading at $40 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a buy stop limit with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the stock price is under $46 (the limit price), then the trade will be filled. If the stock gaps above $46, the order will not be filled.
Sell stop limit are similar to sell stop orders, but as their name states, there is a limit on the price at which they will execute. For example, Frank puts in a sell stop limit order at a stop price of $47 with a limit of $45, if the stock price hits or falls below $47, then the order becomes a live sell-limit order to sell at $45. If the stock price falls below $45 before Frank’s order is filled, then the order will remain unfilled until the price climbs back to $45.
Trailing Stop $ Order: A special stop order where the activation price of the stop order "trails" the price of the security by a dollar amount when it is moving in a favorable direction, but still protects the investor from rapid pullbacks.
Frank bought Company XYZ for $10. He decides that he don't want to lose more than $2 on his investment, but he want to be able to take advantage of any price increases. He also doesn’t want to have to constantly monitor his trades to lock in gains. He could set a trailing stop on XYZ that will automatically sell if the price dips more than $2 below the market price.
The benefits of the trailing stop are two-fold. First, if the stock moves against him, the trailing stop will trigger when XYZ hits $8.00, protecting you from further downside.
But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $18. This helps him lock in most of the gains from the stock's rally.
Trailing Stop % Order: A special stop order where the activation price of the stop order "trails" the price of the security by a percentage amount when it is moving in a favorable direction, but still protects the investor from rapid pullbacks.
Assume you purchased a stock at $10. You could place a 15% trailing stop order (good 'til canceled or GTC) on it right away to protect your principal. This means that if the stock declines by 15% or more, the trailing stop will be triggered, thereby capping your loss. Suppose the stock moves up to $14 over the next few months, and while you have enjoyed its appreciation, you are a little concerned that it could retrace its gains. If the stock price subsequently declines 15% to $11.90 after it has reached $14, the 15% drop would trigger your trailing stop, and assuming you were “filled” at $11.90, the gain on your long position would be 19% ( i.e. the difference between $10 and $11.90)
In addition, you can select the duration of the order (Day, Good for 90 Days), as well as other special conditions (All-or-None, Do-Not-Reduce, Opening Price, Closing Price).
Once a stock order is submitted, it will be displayed as an "open order" on the order status screen, and remain open until it either executes, expires, or is cancelled.
Completing a Trade
What happens after an order is executed? From the point of view of the investor, you will simply see that the funds have been deducted, and the stock purchased now appears in your positions. For the brokerage firm and clearing firm, a complicated procedure takes place to move your money to the seller, and to obtain possession of the stock purchased. The process for a trade to "settle" usually takes 2 business days. This means that if you wish to sell the stock, you must wait for purchase date + 2 business day before you can place a sell order. Conversely if you sell a stock you must wait 2 business day to use the proceeds of the sale.
Extended Hours Trading
While the major exchanges and NASDAQ are only open between 9:30AM and 4:00PM, trading takes place at other times as well on smaller regional or electronic exchange networks. With after-hours trading, investors will have the ability to act on news, earnings and research reports that are released when the traditional markets are closed. Firstrade offers customers the opportunity to trade NASDAQ and selected listed securities after normal market hours through our After-Hours Trading Program, which accepts orders from Monday through Friday from 4:05 pm to 8:00 pm Eastern Time except for holidays.